AMRO Clarifies Annual Consultation Report on Indonesia
The Indonesian economy is expected to maintain solid growth of 5.0 percent in 2024, supported by sustained domestic demand and a recovery in exports and tourism. Inflation is expected to decline, remaining within the target range of 2.5±1%.
With increasing global uncertainty in 2025, policymakers are urged to strengthen policy coordination to maintain stability and support economic activity. Structural reforms remain crucial to achieving long-term growth potential.
These insights are highlighted in the 2025 Annual Consultation Report on Indonesia released today by the ASEAN+3 Macroeconomic Research Office (AMRO). This report is based on the AMRO Annual Consultation Visit conducted in February 2025.
Economic Developments and Prospects
Stronger domestic demand and a recovery in exports support Indonesia’s robust growth in 2024. Domestic demand is expected to remain resilient as growth-boosting policies, including the government’s new priority programs, are implemented amid a challenging external environment in 2025.
Inflation is expected to decline to 1.6 percent by the end of 2024, with an average of 2.3 percent for the year. Inflation remains within the target range of 2.5±1 percent in 2025, supported by close policy synergy between Bank Indonesia (BI) and the government to control inflation.
A resilient trade surplus and strong foreign investment inflows have strengthened Indonesia’s external position despite global uncertainties, including policy changes by the new US administration. Meanwhile, domestic policy priorities, fiscal challenges, layoffs in several labor-intensive sectors, and increased financial market volatility impacted investor sentiment and contributed to downward pressure on the rupiah in early 2025.
Policy Response
Bank Indonesia (BI) strengthened its policy mix to ensure stability and support growth. Prudent interest rate policy, coupled with prudent foreign exchange intervention and pro-market monetary operations, supported inflation control and stabilized the rupiah exchange rate in 2024. BI lowered the benchmark interest rate to 5.75 percent in early 2025 to support the economy, as inflation was below the target range and was expected to remain low while the rupiah exchange rate was consistent with its fundamentals.
With the banking sector remaining healthy, BI strengthened the effectiveness of its liquidity incentive policy related to the minimum reserve requirement (GWM) to encourage bank lending to micro, small, and medium enterprises (MSMEs) and targeted sectors to support growth and job creation. The central bank also intensified efforts to improve payment system efficiency and encourage local currency transactions (LCT).
The government has adopted an expansionary fiscal policy, widening the budget deficit to 2.3 percent of GDP in 2024 to stimulate the economy and accelerate infrastructure projects. In 2025, the budget deficit is likely to widen further as the government has introduced new priority programs, including free nutritious food programs for children, pregnant women, and breastfeeding mothers, as well as additional subsidies for low-income households.
Meanwhile, revenue from the increase in the VAT rate to 12 percent will be lower than planned because it only applies to luxury goods. The implementation of the new Core Tax Administration System aims to improve tax administration efficiency and increase taxpayer compliance.
Risks and Vulnerabilities
Indonesia’s short-term growth prospects, like those of other developing countries, face risks and challenges primarily stemming from the new US administration’s protectionist trade policies and global trade tensions that have increased economic uncertainty in key trading partners, particularly China, the US, and Europe. The risk of capital flow volatility and high borrowing costs persist amid potential global financial tightening.
The government’s medium-term fiscal consolidation target may be difficult to achieve as the budget deficit is expected to widen due to increased spending needs from new priority programs. Longer-term structural challenges include economic diversification and upgrading to high-income country status, narrowing regional disparities, and the transition to a green economy with limited financing options.
Policy Recommendations
AMRO recommends that Bank Indonesia flexibly recalibrate its policy mix to address evolving risks. Given that domestic inflation is expected to remain manageable, further interest rate cuts could be considered to support the economy in line with global and domestic dynamics, provided the rupiah exchange rate is in line with fundamentals and its volatility is not excessive.
Deepening the domestic financial market will strengthen resilience to the risks of continued capital flow volatility, while improvements to the payment system and the promotion of LCTs will continue to facilitate regional trade and investment, and contribute to regional exchange rate stability. The government must intensify efforts to increase revenue mobilization and reprioritize spending to stimulate economic growth. Taxation and administrative policies.
Official Clarification
Previously, the ASEAN+3 Macroeconomic Research Office (AMRO) stated that Indonesia’s government debt-to-GDP ratio is predicted to continue rising and could reach 42 percent by 2029.
This rising debt trend raises concerns about Indonesia’s future fiscal stability. The AMRO Annual Consultation Report: Indonesia 2025 highlights that this surge in debt is due to a widening primary balance deficit and high borrowing costs, while state revenues are stagnant due to the cancellation of the comprehensive VAT rate increase in 2025.
“We feel the need to clarify that we are not making such a statement,” Amro management said in a statement received by a prominent editorial team.
Amro’s report presents a data-based analysis of Indonesia’s macroeconomic conditions and prospects. “While estimating that the government debt ratio could gradually increase to around 42 percent by 2029 if current fiscal trends continue, we do not project a collapse or indicate an imminent crisis in Indonesia.”
Instead, Amro commends the authorities for implementing prudent and disciplined fiscal policy and taking steps to mitigate the risk of rising debt amidst a challenging external environment.
Amro also projects that Indonesia’s medium-term debt sustainability will remain strong, with the debt ratio expected to remain well below the fiscal rule of 60 percent of GDP and also lower than the ASEAN regional average.
Therefore, Amro remains confident in Indonesia’s strong economic fundamentals and the government’s commitment to responsible fiscal management. Amro also forecasts Indonesia’s economic growth to remain solid at above 5 percent through 2029.
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